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Eminent domain may find new use to salvage urban homes

yolanda-andrews Ed MurrayThe Star-Ledger.JPG

Yolanda Andrews’s Newark home is worth less than the mortgage she owes. Now she’s hoping the city will take the property — in this case, the mortgage — through eminent domain.
(Ed Murray/The Star-Ledger)

There has been an inequality of bargaining power between the lender and the borrower." Robert Hockett

Yolanda Andrews bought her one-family home in Newark’s West Ward in 2004 unaware, like almost everyone else in America at the time, that housing prices would come crashing down a few years later and the economy would tumble.

Buying a home in Newark near where she’d grown up had been her dream.
She worked 11 years at the Marriott Hotel in Whippany, but then the economy soured. Her hours were cut back, and eventually she was laid off. She picked up another job, but that ended when the woman she cared for died.

Now she is on disability and struggling to make her mortgage payments.

Her lending bank, Wells Fargo, worked with her to modify the loan, bringing the monthly payments down by $49 a month. But the payments are still beyond her reach and her home is worth less than the mortgage amount, meaning she can’t sell, even if she wanted to.

Her last hope is that the city takes the property through eminent domain.

The Newark city council is expected to discuss the issue as early as this week.

Typically, eminent domain is used to seize a property that is a blight to the community and re-use it in a way that benefits everyone, such as building a highway or a park. In this case, however, the city would seize the mortgage — not the house. Under the law, the term “property” has a broad definition.

Newark would not be the landlord, but would give or sell the mortgage to a third party, which would pay the lender fair market value and then issue a new mortgage based on the property’s true worth.

If a bank rejects the fair-market offer, then it’s left with nothing because the government has seized the mortgage.

Advocates are betting lenders would rather have pennies on the dollar than nothing, and this could be the stick that drives them to the negotiating table.

Using eminent domain to seize underwater mortgages is an untested idea that has been promoted by Robert Hockett, a law professor at Cornell University, and a handful of others since 2008.

Hockett advised both President Obama’s and Mitt Romney’s campaign teams leading up the 2008 election. Neither candidate adopted the idea, but he found local communities expressing interest.

“The problem is ultimately with underwater loans,” he said, in which the mortgage is greater than the value of the house.“Housing prices drop, but debt doesn’t,” he said. “I thought, there has to be some way to bring debt back in line with housing prices.”

‘It’s like a flood’
Lending institutions have worked with struggling homeowners on loan modifications through a variety of programs, but are less inclined to reduce the loan principal. In many cases, lenders will lower a monthly payment, only to tack the difference on at the end of the loan.

“The underwater loan problem is causing urban blight,” Hockett said. “It’s like a flood. Once one house is underwater, it spreads to other homes.”

Hockett stops short of calling the use of eminent domain a “nuclear option” in efforts to get banks to reduce principal, but “it’s a last resort when everything else fails,” he said.

“There has been an inequality of bargaining power between the lender and the borrower, which makes it hard to bring all parties to the table. If this can bring everyone together to find a reasonable compromise, that’s optimal,” he said. “In theory, this benefits the creditor and the lender alike.”

Trina Scordo, executive director of New Jersey Communities United, has been promoting the idea on a grassroots level. Newark and Irvington will be the test cases in New Jersey.

“I am not a fan of eminent domain,” she said. “Our history with it is not a positive one. But it comes into play now because lenders will not work with the homeowners. Our goal is to reset the property to market value.”

Chicago and San Bernadino, Calif., explored the tactic and decided not to adopt it. But the city of Richmond, Calif., is expected to employ eminent domain to seize a mortgage this week. That pushed Rep. John Campbell (R-Calif.) to introduce legislation that would discourage municipalities from taking this type of action.

Measures such as Campbell’s don’t discourage Scordo.

“We don’t believe (Congress) is where the fight is going to be or that the bill has legs,” she said. “This doesn’t mean we’re not going to have a battle. But this fight will happen at the local level.”

Among the foes are the Mortgage Bankers Association, whose chief executive, David Stevens, last week issued a statement supporting Campbell’s bill.

The Securities Industry and Financial Markets Association, Wall Street’s largest lobby group representing banks and securities firms, also opposes the proposed use of eminent domain.

Tim Cameron, head of the SIFMA asset management group, said using eminent domain as a way to help homeowners “is going to be detrimental to the very individuals and communities people think it will help.”

Cameron looks at the broader picture and said seizing mortgages and taking capital investment out of the market has a ripple effect.

Government-insured residential mortgage securities is one of the largest asset classes in large mutual and pension funds.

Carmeron called it “the gasoline that makes the economic engine go.” But investors will be less interested in backing mortgages in municipalities that threaten to take them away because a homeowner has trouble making payments.

“They’ll move to other categories,” he said.

He said other investors will shy away from cities like Newark as well.

“Investors never thought a municipality could or would exercise eminent domain in this way. It’s an additional risk in the matrix. When you invest, you want a return or you’ll never invest again. They won’t put money in Newark for fear the city will take it away. And then your credit dries up.”

Only a few will benefit, he said.

“It benefits those who get paid for carrying out the scheme and it benefits those very few who stand to be helped by it,” he said.

A long battle
The battle has a long way to go before eminent domain becomes a tool to protect homeowners.

“It’s going to require judicial interpretation,” said Charles Gormally, an attorney with Brach Eichler in Roseland.

Before a government can seize a property — tangible, like a house, or intangible, like a mortgage — it must prove the property is a blight, and seizing it serves a public good.

Advocates say those standards are easy to reach.

In Newark, for example, home values have dropped an estimated $1.9 billion since 2008 as a result of foreclosures. When property values drop, so do tax revenues, resulting in homeowners paying a larger piece of the pie in property taxes and fewer police and firefighters on the streets.

Newark has spent about $56 million in the past four years on safety inspections, police and fire department calls, and property maintenance for distressed and abandoned properties.

More than 9,000 Newark homeowners owe, on average, more than $70,000 on their mortgages than what their homes are worth, according to New Jersey Communities United.

Gormally said there is room for debate there.

“I don’t know if the mortgage has caused the blight or if it’s the homeowner walking away,” he said.

There is another benchmark governments must reach, which is paying fair market value for the property.

“If you get past the legal challenges of whether the municipality has the power, what’s the right price for the mortgage?” he said. “It’s obviously less than the face value of the mortgage.”

Gormally questions the possible use of eminent domain to help homeowners renegotiate their loans.

“The process is not foreign to the marketplace. What’s foreign is having the government involvement.”

In Newark, councilmen Ron Rice Jr. and Darrin Shariff have been leading the charge. They expect to bring it up at the next council meeting.

“I’m just going to do a test case,” Rice said. “I’m willing to do it and I’m willing to have it taken to court. If this should win it would set a precedent. In my opinion, it’s what has to happen to force the industry to deal with (struggling homeowners) in a real way. My job as a council person is to use whatever leverage I can.

“If it does work, the mortgage companies will fall like a house of cards and will have to rethink their reasons for not dealing with the homeowners in the right way,” he said